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Research and Development (R&D) Tax Credits available to SMEs
The toothbrush. The world’s first ATM. The Internet. For a relatively small island, the UK is big on innovation and if you’re an SME (small to medium-sized enterprise) that is researching and developing new processes or products, or improving upon pre-existing ones then you need to know about SME research and development (R&D) tax credits.
What are SME R&D tax credits?
Designed to reward UK companies for investing in innovation and launched in 2000, SME R&D tax credits is a government incentive that not all businesses are claiming.
Does your SME qualify for R&D Tax Credits?
SMEs are the backbone of British business. The usual definition of an SME is any business with fewer than 250 employees and there were 5.9 million of them in the UK in 2019 according to a House of Commons briefing paper dated July 2020, which accounts for over 99% of all businesses.
The SME R&D tax credits scheme applies to a company with less than 500 staff on its payroll, and either no more than €100 million turnover or €86 million gross assets. Most companies, including start-ups, fall into this category. Your company must be a UK-registered limited company subject to corporation tax, having taken the qualifying R&D activity as per HMRC’s guidelines, and we’ll cover more on this in a moment.
If you are making a claim for the first time, you can claim R&D tax credits for your last two completed accounting periods. Irrespective of whether your company is currently making a profit or operating at a loss, a claim could still be possible. A profit-making company can receive a corporation tax reduction and this can range from 24.7% to 26% of qualifying expenditure, depending on the financial years in question.
A loss-making company can receive a cash credit up to 33.35% of the qualifying expenditure. In the circumstances where R&D turns a profit into loss, a company can receive a combination of both. We’ll further demystify the guidelines for you and shine a light on qualifying activity in every corner of your business, regardless of sector. The bottom line is if you are spending money on R&D, then you are eligible to claim tax credits.
Which costs qualify your SME for R&D tax credits?
Navigating the guidelines can be rather tricky because they are open to interpretation, but this also allows for qualifying activity to be found in every part of a business.
Revenue Expenditure
An SME can claim R&D tax credits on revenue expenditure. This takes in operational costs likewise any costs incurred form creating a trademark and the distribution of goods and services. Capital expenditure on fixed assets such as land and buildings cannot form part of your claim.
Staff costs
This applies to those employees that have worked directly on the R&D project, as well as wages, overtime, cash bonuses, employer NI contributions, employer pension contributions and applicable reimbursed business expenses. Certain subcontractors can also be included in a claim and if some of your R&D project has been outsourced to another company, this can be included in your claim too. You can claim up to 65% of their subcontracted R&D costs, but only under the SME scheme.
Software
Software integral to R&D or involved in R&D activities is okay just as long as it was developed or purchased specifically for the project. If the software was partially used for the R&D project, then its cost must be apportioned. Excluded from this are general operating software, email hosting costs and the like.
Consumables
Materials and resources that are used up or consumed in your R&D process, such as water, fuel, and power can be included in your claim, apportioned, or whole. Materials that were sold onto a client do not count.
How can we help?
SME R&D tax credits is just one area of expertise for our team and we will streamline this process for you by answering any questions you have because we want to reward businesses that innovate by incentivising further funding of their research and development efforts. So leave it to the experts to it. Check your SMEs eligibility for R&D Tax Credits now.
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